Don't jeopardize great credit with new credit

Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

Dear Opening Credits,
My credit score has been at 725 for four months in a row. The company that is monitoring my credit said that if I want to get my credit up I should get a major credit card. I have a Visa, MasterCard and American Express. My question is: Should I get another credit card and which one? Thank you. -- A.D.L.

Dear A.D.L.,
Hmm. This isn't making a whole lot of sense to me. First, a FICO score of 725 is more than decent. The numbers range from a low of 300 to a high of 850, so you can clearly see that you're at the higher end of the spectrum. This is not to say that you can't or shouldn't increase it, but you'd have to have a specific reason for going out of your way to do so.

A second oddity is that the credit monitoring service is instructing you to secure another line of credit when it appears that you have an ideal amount and credit mix. Visa and MasterCard aren't banks or credit card companies themselves, but they do process the payments for the major credit issuers -- which means you already have revolving lines of credit. American Express is most definitely a credit issuer, but it also offers charge cards, as well. (A charge card, by the way, is one that you must pay off at the end of each month; carrying balances month to month isn't allowed.) If you are in possession of one of those, too, you're good to go in my eyes. Unless you require more borrowing power, I see no reason here to add to the three types of plastic that you currently carry in your wallet. Plus, if you open another line of credit, there will be a temporary ding to your score when the lender checks your credit.

One thing you can do, besides keeping the total balances on your three cards below 30 percent of your available credit, is asking one or all of your card issuers to raise your credit limit on those cards, which can increase your debt-to-available-credit ratio (or credit utilization ratio). For example, if you have a $10,000 credit limit on your Visa and a $3,000 balance, you are using 30 percent of your available credit. You can decrease your utilization ratio by either paying down the balance or increasing your credit limit. You also need to figure what your total available credit (add the credit limits of all three cards together) is to your total debt. The lower the total debt to total available credit, the better.

Businesses that monitor credit activity can be good for one thing: keeping a close watch on what's going on with a consumer's credit reports and scores. Pay for the service and they will quickly alert you if there is anything suspicious going on that might indicate fraud or identity theft. You can do the same thing for free by routinely checking your statements and reports, but some people do feel comforted to know that a separate company is on your side and looking out for any funny business.

So let's go back to your score. Maybe you are interested in buying a home some day and would like to qualify for a really great mortgage. In that case, I can see why you'd want it to be as high as possible. Your score, along with your income and debts, are the biggest factors in qualifying for a loan.

As of late 2011, the best interest rates are available to those with scores of 740 and above, so you don't have far to go. To get there, you don't need another card; just use what you have exceptionally well. You may have some debt to pay down, so concentrate on deleting it. Or maybe you don't charge with the cards often enough: Creditors tend to like to assess how you have borrowed and repaid in the very near past. If that's the case, make some extra charges on things you need over the next few months. Pay the balance in full and on time when the bill arrives. Just that flurry of good credit activity can cause your scores to spike.

If you don't need an outrageously good credit score right now, don't bend over backward trying to hike it up, and don't apply for more credit than you need. Be happy with what you've got and how you've been managing it. Seems to me that you're on the right track, so stay the course!

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Published: December 21, 2011

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